Waiting Room: Which funds are the undiscovered stars of US equity?

For many investors, a minimum three-year track record remains a prerequisite for considering a fund, immediately ruling out new launches.

While there is an argument for allowing managers to build up a record, the magic three-year rule should be qualified based on who is buying a fund. As a professional multi-manager, it is my job to understand managers and their styles and that should allow me to make a judgement call on new funds. The opportunity cost of missing three years of performance is potentially considerable, particularly given the calibre of managers launching funds in recent years.

This month, we focus on the US equity space – a notoriously difficult hunting ground for UK investors to find consistent outperformance over the years.

Considering the US accounts for 52 per cent of the FTSE All-World Index, against just 6.7 per cent for the UK, the sector has to play a part for investors seeking a properly diversified equity portfolio.

Many have claimed the efficiency of the S&P and Russell indices makes them difficult to beat, and several investors have turned to passive options as active managers have disappointed. There are active managers in the sector that have posted long-term outperformance and we have tended to use a core/satellite approach to the US, blending a low-cost tracker – for broad market exposure – with the active names our process has identified.

UBS S&P 500 Index fund

Warren Buffett once offered some very simple advice for investing long-term in the US stock market. In the March 2014 Berkshire Hathaway annual report, he revealed the instructions in his will advising his wife to place 10 per cent in short-term government bonds and the balance into a low cost S&P 500 index fund.

This statement says little for his confidence in other active fund managers or maybe the ability of the average investor to pick a high-performing fund. Buffett suggested the non-professional should not be investing in a handful of stocks with the potential to outperform but rather a basket of companies representing a variety of industries and sectors.

UBS launched its UK-domiciled Oeic in September 2014, six months post Buffett’s report and had attracted £418m to the end of February. With no initial charge and an ongoing charge of 0.09 per cent per annum, this fund offers UK investors low-cost access to the S&P 500 index. UBS has experience in this sector, setting up one of the first UK index tracking funds in 1979. Its approach is basically to physically replicate the whole index, although the manager is allowed a small tracking error to invest in companies that, in its opinion, are expected to become part of the benchmark. This strategy has been rewarding since launch, with the C share up 10.1 per cent against 9.79 per cent from the index.

Loomis Sayles US Equity Leaders fund

There is a debate when investing in overseas country-specific or regional funds whether it is best to select managers based in that market real time or outside the market in a different time zone. This has been the subject of much academic research over the years but without, in my opinion, conclusive evidence that one approach works better than the other; it is simply a case of what works best for each manager’s investment philosophy, approach and style.

That said, investment style is an important factor in the domestic US funds industry, which is strongly influenced by Morningstar’s nine-strong matrix of value/growth and large/small-cap styles. For non-professional fund buyers in the UK, this is perhaps not a factor but it is an explanation for the challenging translation of US fund managers into the IA North America sector.

All funds investing in US equities are lumped into the same IA sector regardless of style. Loomis Sayles, part of Natixis Global Asset Management, decided to launch one of its more successful strategies into the UK funds market in April 2013. This is a highly concentrated portfolio, typically 30 to 40 stocks, and replicates a strategy run for many years in the US.

Loomis, Sayles & Company was founded in 1926 and offers active management pursuing a bottom-up stockpicking approach to portfolio construction. As the name of the fund suggests, it invests in leaders; well-known names that are listed in the US but not necessarily deriving all their profits from the US economy. The top 10 holdings list Facebook, Visa, Coca Cola and Amazon among others as major holdings. This fund is £128m in size but is part of a much larger mandate that has returned 16.2 per cent versus the 11.4 per cent rise of IA North America sector average since launch.

Artemis US Select fund

It is often surprising to see an experienced and successful investment team up sticks from a large house and start again at a smaller company. Even more surprising when their investment capability is US equities, an asset class that has attracted more than its fair share of passive investments. However that is exactly what Cormac Weldon, Stephen Moore, William Warren and their team of US analysts did in 2014 in leaving Threadneedle to join Artemis.

Furthermore, they looked to replicate their range of funds with three long-only and two long-short strategies. The lead manager on the long-only funds is Cormac Weldon with over 25 years of experience investing in US equities. Of the three funds I have chosen to highlight Artemis US Select. This is the concentrated portfolio of around 50 stocks with the higher tracking error, representing the team’s best ideas generated through fundamental bottom-up analysis. The US franchise has been quickly re-established at Artemis and this fund stands at £403m in size since launch in September 2014. No doubt the continuing consistency of returns has helped fundraising: the fund is up 19.2 per cent versus the IA North America sector average return of 12.4 per cent from launch to the end of February.